STATE OF NEBRASKA

Department of Insurance

EXAMINATION REPORT

OF

LIBERTY NATIONAL LIFE INSURANCE COMPANY

as of

December 31, 2015

TABLE OF CONTENTS

Item Page Salutation ...................................................................................................................................................... 1 Introduction ................................................................................................................................................... 1 Scope of Examination ................................................................................................................................... 2 Description of Company: History .................................................................................................................................................... 4 Management and Control: Holding Company ............................................................................................................................ 6 Shareholder ...................................................................................................................................... 6 Surplus Note .................................................................................................................................... 7 Board of Directors............................................................................................................................ 8 Officers ............................................................................................................................................ 9 Committees ...................................................................................................................................... 9 Transactions with Affiliates: Tax Allocation Agreement ............................................................................................................. 10 Master Services Agreement ........................................................................................................... 10 Bill Pay Services Agreement ......................................................................................................... 10 Recruiting Services Agreement ..................................................................................................... 11 Medical Records Services Agreement ........................................................................................... 11 Information Technology and Data Processing Agreement ............................................................ 11 Cost Sharing Agreement ................................................................................................................ 12 Naming and Licensing Cost Sharing Agreement ........................................................................... 12 Agent Compensation System Cost Sharing Agreement ................................................................ 13 Affiliate Loans ............................................................................................................................... 13 Territory and Plan of Operation ........................................................................................................... 13 Reinsurance: Assumed ......................................................................................................................................... 14 Ceded-Affiliates ............................................................................................................................. 16 Ceded-Non-affiliates ...................................................................................................................... 16 General ........................................................................................................................................... 17 Body of Report: Growth .................................................................................................................................................. 17 Financial Statements ............................................................................................................................. 18 Examination Changes in Financial Statements .................................................................................... 22 Compliance with Previous Recommendations ..................................................................................... 22 Commentary on Current Examination Findings ................................................................................... 23 Summary of Comments and Recommendations ......................................................................................... 23 Acknowledgment ........................................................................................................................................ 24

McKinney, TX December 20, 2016

Honorable Bruce R. Ramge Director of Insurance Nebraska Department of Insurance 941 “O” Street, Suite 400 Lincoln, Nebraska 68508 Dear Sirs: Pursuant to your instruction and authorizations, and in accordance with statutory

requirements, an examination has been conducted of the financial condition and business affairs of:

LIBERTY NATIONAL LIFE INSURANCE COMPANY which has its Statutory Home Office located at

10306 Regency Parkway Drive

Omaha, NE 68114 with its Principal Executive Office located at

3700 S. Stonebridge Drive

McKinney, TX 75070 (hereinafter also referred to as the “Company”) and the report of such examination is respectfully

presented herein.

INTRODUCTION

The Company was last examined as of December 31, 2011 by the State of Nebraska. The

current financial condition examination covers the intervening period to, and including, the close

of business on December 31, 2015, and includes such subsequent events and transactions as were

considered pertinent to this report. The States of Nebraska, Indiana, Ohio, and New York

participated in this examination and assisted in the preparation of this report.

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The same examination staff conducted concurrent financial condition examinations of the

Company’s affiliates/subsidiaries, American Income Life Insurance Company (American

Income), Family Heritage Life Insurance Company of America (Family Heritage), First United

American Life Insurance Company (First United), Globe Life and Accident Insurance Company

(Globe), National Income Life Insurance Company (National Income), and United American

Insurance Company (United American).

SCOPE OF EXAMINATION

This examination was conducted pursuant to and in accordance with both the NAIC

Financial Condition Examiners Handbook (Handbook) and Section §44-5904(1) of the Nebraska

Insurance Statutes. The Handbook requires that examiners plan and perform the examination to

evaluate the financial condition and identify prospective risks of the Company by obtaining

information about the Company including, but not limited to: corporate governance, identifying

and assessing inherent risks within the Company, and evaluating system controls and procedures

used to mitigate those risks. The examination also includes assessing the principles used and

significant estimates made by management, as well as evaluating the overall financial statement

presentation and management’s compliance with Statutory Accounting Principles and Annual

Statement Instructions, when applicable to domestic state regulations.

The examination was completed under coordination of the holding company group

approach with the Nebraska Department of Insurance as the coordinating state and the Indiana

Department of Insurance, Ohio Department of Insurance, and the New York Department of

Financial Services as participating states. The companies examined under this approach benefit

to a large degree from common management, systems and processes, and internal control and

risk management functions that are administered at the consolidated or business unit level.

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The coordinated examination applies procedures sufficient to comprise a full scope

financial examination of each of the companies in accordance with the examination procedures

and standards promulgated by the NAIC and by the respective state insurance departments where

the companies are domiciled. The objective is to enable each domestic state to report on their

respective companies’ financial condition and to summarize key results of examination

procedures.

A general review was made of the Company’s operations and the manner in which its

business has been conducted in order to determine compliance with statutory and charter

provisions. The Company’s history was traced and has been set out in this report under the

caption “Description of Company”. All items pertaining to management and control were

reviewed, including provisions for disclosure of conflicts of interest to the Board of Directors

and the departmental organization of the Company. The Articles of Incorporation and By-Laws

were reviewed, including appropriate filings of any changes or amendments thereto. The

minutes of the meetings of the shareholder, Board of Directors and committees, held during the

examination period, were read and noted. Attendance at meetings, proxy information, election

of Directors and Officers, approval of investment transactions and authorizations of salaries were

also noted.

The fidelity bond and other insurance coverages protecting the Company’s property and

interests were reviewed, as were plans for employee welfare and pension. Certificates of

Authority to conduct the business of insurance in the various states were inspected and a survey

was made of the Company’s general plan of operation.

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Data reflecting the Company's growth during the period under review, as developed from

the Company's filed annual statements, is reflected in the financial section of this report under

the caption "Body of Report".

The Company's reinsurance facilities were ascertained and noted, and have been

commented upon in this report under the caption "Reinsurance". Accounting records and

procedures were tested to the extent deemed necessary through the risk-focused examination

process. The Company’s method of claims handling and procedures pertaining to the adjustment

and payment of incurred losses were also noted.

All accounts and activities of the Company were considered in accordance with the risk-

focused examination process. This included a review of workpapers prepared by Deloitte &

Touche, LLP, the Company’s external auditors, during their audit of the Company’s accounts for

the years ended December 31, 2014 and 2015. Portions of the auditor’s workpapers have been

incorporated into the workpapers of the examiners and have been utilized in determining the

scope and areas of emphasis in conducting the examination. This utilization was performed

pursuant to Title 210 (Rules of the Nebraska Department of Insurance), Chapter 56, Section 013.

Any failure of items to add to the totals shown in schedules and exhibits appearing

throughout this report is due to rounding.

DESCRIPTION OF COMPANY

HISTORY

The Company, under the name Heralds of Liberty, was incorporated under the laws of

the state of Alabama and commenced business on August 31, 1900. The incorporation of the

Company was confirmed by a special act of the General Assembly of Alabama on February 12,

1901.

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On October 5, 1925, the Declaration, Articles and Certificate of Incorporation

were amended to change the corporate name from Heralds of Liberty to Liberty Life

Assurance Society and to change the location of the principal office from Huntsville,

Alabama to Birmingham, Alabama.

On September 6, 1927, the Alabama Legislature adopted an act designed to authorize

and regulate the conversion of fraternal benefit societies into stock life insurance companies or

mutual life insurance companies. Pursuant to this act, the Supreme Lodge of the Company,

which was the supreme governing or legislative body, adopted a resolution on March 29,

1929, authorizing the conversion of the Company into a stock life insurance company,

changing the corporate name from Liberty Life Assurance Society to Liberty National Life

Insurance Company and providing for proper amendments to the Declaration, Articles and

Certificate of Incorporation. The object of the Company, as stated in the Certificate of

Incorporation, as amended, was to issue insurance upon the lives of persons and

everyinsurance appertaining thereto or connected therewith, as permitted by the laws of the

State of Alabama.

The Company began operations as a stock company on July 1, 1929, with paid-up

capital of $216,830 and paid-in- surplus of $108,415. The authorized capital stock at the

date of conversion to a stock company was $306,125, comprised of 61,225 shares of

common stock with a par value of $5 per share.

The Company re-domiciled from the state of Alabama to Nebraska on March 28,

2008.

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MANAGEMENT AND CONTROL

Holding Company

The Company is a member of an insurance holding company system as defined by

Nebraska Statute. An organizational listing flowing from the ‘Ultimate Controlling Person”, as

reported in the 2015 Annual Statement, is represented by the following (subsidiaries are denoted

through the use of indentations, and unless otherwise indicated, all subsidiaries are 100%

owned):

Torchmark Corporation TMK Buildings Corp Liberty National Life Insurance Company Brown-Service Funeral Homes Company, Inc. Liberty National Auto Club, Inc. SAFC Statutory Trust I American Income Life Insurance Company American Income Marketing Services, Inc. Union Heritage Life Assurance Company, Ltd. National Income Life Insurance Company Torchmark Insurance Agency, Inc. Globe Life and Accident Insurance Company Globe Marketing Services, Inc. Globe Marketing and Advertising Distributors, LLC Family Heritage Life Insurance Company of America Royalton 6001 Ltd. (50% owner) United American Insurance Company First United American Life Insurance Company TMK re, Ltd. Specialized Advertising Group, Inc. AILIC Receivables Corporation Globe Life Insurance Agency, Inc. TMK Properties LP* * Torchmark Corporation is the Limited Partner and TMK Buildings Corp. is the General Partner

Shareholder

The Amended and Restated Articles of Incorporation authorize the Company to issue

2,000,000 shares of preferred capital stock and 10,500,000 shares of common stock, each with

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par value of $1 and $4, respectively. As of December 31, 2015, there were 10,265,177 common

and 1,330,000 preferred shares of stock issued and outstanding. All of the outstanding preferred

and common shares of the Company are held by the parent, Torchmark Corporation (Torchmark)

a financial services holding Company.

During the period under review the Company declared a $3,990,000 ordinary dividend on

its preferred capital stock to Torchmark each quarter.

The Company also declared ordinary dividends on its common capital stock to

Torchmark in the following amounts:

Date Amount

December 4, 2015 $20,041,000 July 31, 2015 41,657,000 June 10, 2015 41,656,000 March 20, 2015 13,230,000 December 4, 2014 45,041,000 July 31, 2014 41,657,000 June 10, 2014 41,656,000 March 20, 2014 6,773,000 December 3, 2013 41,656,000 July 31, 2013 41,657,000 June 10, 2013 41,656,000 March 12, 2013 22,328,000 December 31, 2012 41,656,000 July 27, 2012 41,657,000 June 8, 2012 41,656,000 March 6, 2012 29,915,000

Surplus Note

With prior approval from the Director of the Nebraska Department of Insurance

(Director), the Company issued a surplus note in the amount of $50,000,000 on December 23,

2009 at an interest rate of 9.25% to Torchmark. In 2012, $25,000,000 was repaid. At December

31, 2015, $25,000,000 of the original surplus notes issued was outstanding. The surplus note

may only be repaid, in principal and/or interest, when the Company’s reported surplus in excess

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over all liabilities is double the amount of any principal and/or interest being paid. In addition,

surplus note principal and interest payments can only be made by the Company upon prior

approval being received from the Director. The surplus note calls for semi-annual interest

payments due in April and October.

Board of Directors

The Company’s By-Laws state, “the number of Directors shall be five (5) but may, by

resolution of the Board of Directors, be increased to any greater number of Directors. The

Directors shall be elected at the annual meeting of the stockholders and each Director shall be

elected to serve until his successor shall be elected and shall qualify.”

The following persons were serving as Directors at December 31, 2015

Name and Residence Principal Occupation

Frank J. Barrett General Counsel, Lamson, Dugan, & Murray LLP Omaha, NE

Steven John DiChiaro President of the Company Frisco, TX Robert Brian Mitchell General Counsel and Executive Vice President McKinney, TX Torchmark Roger C. Smith Chief Executive Officer of the Company Frisco, TX Frank Martin Svoboda Executive Vice President and Chief Financial Officer, Grapevine, TX Torchmark

According to Article III of the Company’s By-Laws, “Directors shall not receive any stated

salaries for their services as directors or as members of committees, except that by resolution of the

Board of Directors, retainer fees, meeting fees, expenses for attendance at meetings and other

benefits and payments may be authorized. Nothing contained herein shall be construed to preclude

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any director from serving the Corporation in any other capacity as an officer, agent, or otherwise

and receiving compensation therefor.”

Officers

According to Article IV, Section 1of the By-Laws, “the Officers of the Corporation shall

be President and a Secretary, who shall be elected by the Board of Directors and who shall hold

office until their successors are elected and qualified. In addition, the Board of Directors may

elect one or more Vice Presidents, a Treasurer and such Assistant Secretaries and Assistant

Treasurers as they deem proper. More than one office may be held by the same person. The

Officers are elected at the first meeting of the Board of Directors after each annual meeting of

the shareholders.”

The following is a partial listing of Senior Officers elected and serving the Company at

December 31, 2015

Name Officer

Roger C. Smith Chief Executive Officer Steven J. DiChiaro President Jon Andrew Adams Senior Vice President, Financial Reporting and Controller Susan Idol Allen Senior Vice President, Product Actuary and Illustration Actuary David Kendall Carlson Senior Vice President-Tax Richard Scott Elliott Senior Vice President of Information Technology John Kevin Hall Senior Vice President Shane Henrie Senior Vice President, Corporate Accounting, Chief Financial Officer and Assistant Treasurer Ben W. Lutek Senior Vice President and Actuary Robert Brian Mitchell Senior Vice President, General Counsel and Secretary

Committees

During the period covered by this examination, the Company did not appoint any

committees of the Board of Directors. Board committees are appointed at the holding company

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level and perform centralized duties for all of the companies in the group. The following

committees are in place at the holding company level: Audit, Compensation, and Governance &

Nominating.

TRANSACTIONS WITH AFFILIATES

Tax Allocation Agreement

The Company and each of the subsidiaries of Torchmark are parties to a tax allocation

agreement effective January 1, 1989. The agreement allocates the federal income tax liability in

an amount equal to that which would have been reported had separate tax returns been filed.

Master Services Agreement

Effective June 1, 1994, the Company entered into a master service agreement with its

ultimate parent, Torchmark. Under this contract, each party agrees to provide each other on

request the following services: executive, financial, legal, accounting, and other services. For all

services provided by Torchmark, the service fee is a portion of Torchmark’s total operating

expenses for the immediately preceding calendar year determined as a percentage of salary and

benefits of the Company to the consolidated salaries and benefits of Torchmark under the

contract. During 2015, the total amount paid under this agreement was approximately

$8,772,000. The agreement includes an investment management arrangement with Torchmark.

The Company is charged a fee based on the total value of the securities managed. During 2015,

total investment management fees paid under this agreement was approximately $9,472,000.

Bill Payment Services Agreement

Effective November 1, 2005, the Company entered into a bill payment service agreement

with affiliates United American, Globe, and American Income, whereby each of the companies

may, from time to time, elect to perform bill-paying services for one or more of the other

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companies. The cost incurred by each of the companies in providing these bill paying services is

nominal and, thus such cost shall not be reimbursable.

Recruiting Services Agreement

Effective March 1, 2006, the Company entered into a recruiting services agreement

which provides that Globe will furnish agent recruiting services to American Income, United

American, and the Company. Each of the respective companies agreed to pay their respective

proportionate share of the salary and/or wage expenses incurred by Globe in connection with

providing such agent recruiting services.

Medical Records Services Agreement

Effective February 1, 2007, the Company entered into a medical service agreement with

American Income, whereby upon request from the Company, American Income will obtain

medical records for an on behalf of the Company for use in the underwriting and claims

investigation process. The Company pays an $11 service fee for each medical record requested

and reimburses American Income for the actual cost of the medical records received from the

provider.

Information Technology and Data Processing Service Agreement

Effective January 1, 2008, the Company entered into an information technology services

agreement with affiliates American Income, Globe, and United American, whereby affiliates

provide to each other various information technology and data processing services. The services

include, but are not limited to: programming, processing, report preparation, data files, check

writing, and other technology and data services as mutually agreed upon. These costs are

calculated by including, but are not limited to salaries and benefits for information technology,

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personnel, hardware, software, licensing, program development, testing, report production and

operating overhead calculated by utilizing of policy count.

Cost Sharing Agreement

Effective January 1, 2011, the Company entered into a service agreement with affiliates

American Income, Globe, and United American. Under the terms of this agreement, these

affiliates, all being subsidiaries of Torchmark, incur various costs which benefit not only the

purchaser, but all of the affiliates. The agreement outlines terms by which these affiliates, who

desire to establish ongoing terms for the provision of such services and allocation of costs, share

costs amongst the service providers and service beneficiaries. These services include:

underwriting, marketing, travel, sales support, quality assurance, agent supplies, information

technology agency support, telecommunications, compliance, actuarial, and such additional

services as the affiliates from time to time shall mutually agree. Effective January 1, 2015

affiliate Family Heritage was added via amendment to the agreement.

Naming and Licensing Cost Sharing Agreement

Effective May 1, 2014 the Company, its affiliates Globe, United American, American

Income, and Family Heritage, along with their ultimate parent Torchmark entered into a cost-

sharing agreement related to a Naming and License Agreement dated January 29, 2014. This

Naming and License Agreement was entered into by Torchmark and Globe with Rangers

Baseball LLC, owner and operator of the Texas Rangers Baseball Club of MLB. In recognition

of the benefits of the subsidiaries and the Parent resulting from the Naming Rights Agreement

the companies are sharing in and allocating the costs (approximately $46 Million over 10 years,

with additional costs related to signage and the stadium suite) of the agreement amongst the

participating affiliates, In general these allocations are as follows 67.4% to Globe, 6.6% to

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Torchmark, and the remaining 26% shared equally amongst the remaining affiliates. Cost

allocations shall be made monthly and billed to the applicable subsidiary within 15 days of the

end of each calendar month, and remitted to Torchmark within 5 days of receipt of the invoice.

Agent Compensation System Cost Sharing Agreement

Effective October 1, 2014, the Company, with affiliates United American, Globe, and

American Income, entered into a cost sharing agreement whereby the costs of computer software

and implementation services purchased by United American related to a new agent compensation

system would be shared amongst the affiliates utilizing it. Costs related to software and

implementation services are allocated based on the average monthly producing agent count of

each subsidiary. Costs allocated to each subsidiary will be billed by United American 30 days

following the staggered “go live” date for each subsidiary, and are to be paid in full within 30

days of receipt of the invoice.

Affiliate Loans

As of December 31, 2015 the Company had outstanding loan balances due from affiliates

Torchmark Re Ltd. and AILIC Receivables Corporation in the amounts of $20,000,000 and

$130,400,000 respectively, each at an interest rate of 3.25%. These loans were repaid in full on

February 12, 2016, and June 14, 2016 respectively.

Torchmark affiliates borrow money within the holding company periodically throughout

the year to meet cash flow needs which arise as a result of various investment opportunities.

TERRITORY AND PLAN OF OPERATION

As evidenced by current or continuous Certificates of Authority, the Company is licensed to

transact business in the District of Columbia, Guam, and all states of the United States, except New

York.

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The Company markets term and whole life insurance products and supplemental health

policies primarily through home and workplace marketing methods. The majority of the Company’s

premium production is created through two distribution channels: Liberty National Exclusive

Agency and Liberty National General Agency. Liberty National Exclusive Agency’s distribution

system sells life and health insurance, primarily in the seven-state area of Alabama, Florida,

Georgia, Tennessee, Mississippi, South Carolina, and North Carolina.

In recent years the Company has been expanding its footprint outside of it historical

geographical areas listed above and improving efficiencies. In addition, the Company has

restructured its agency operation from a fixed cost sales model to a variable cost model. At year-

end 2015, the Company had 1,478 producing agents, up from 1,345 as of the last examination. The

Company continues to execute its long term plan to grow its agency through expansion from small

recruits and customers.

The Company has an agreement with First Command Financial Services to sell the

Company’s products predominately to military personnel. First Command Financial Services’ sales

force is comprised of former commissioned and non-commissioned military officers and their

families. This business is comprised of whole life products with term insurance riders.

REINSURANCE

Assumed

The Company has an agreement with Security Benefit Life Insurance Company (SBLIC)

which covers both bulk assumption and all future issues of SBLIC on a block of individual

whole life and term insurance policies. The effective date of the treaty was December 31, 1995.

On September 23, 1998 a successor trustee agreement naming Sterne, Agee, & Leach as

successor trustee was issued without objection by SBLIC.

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Effective October 1, 2010, the Company entered into an Annuity Coinsurance Agreement

with an affiliate, United American, whereby the Company is assuming 100% of United

American’s liability on a coinsurance with funds withheld basis. The Company is liable for all

benefits payable under the policies which are in-force on the effective date including, with

limitation, surrenders, death benefits, and benefits due under a policy where annuitization has

begun on or prior to the effective date. The funds withheld as of December 31, 2015 is

$833,690,281.

Pursuant to a stock purchase agreement entered into between the Company’s parent,

Torchmark and Protective Life Insurance Company, for the sale of United Investors Insurance

Company (United Investors) dated September 13, 2010, the Company and United Investors have

entered into a Coinsurance and administrative services agreement. The terms of the agreement

specify that the Company shall reinsure, on an indemnity coinsurance basis, 100% of the

coinsured liabilities arising under coinsured business which consists of all non-variable life

insurance policies, binders, slips, contracts, certificates, endorsements, supplements, riders, and

all amendments thereto. This business is categorized as that which was sold either through the

Direct Response (including certain agent-sold business) or Liberty National Exclusive Agency

Distribution systems of the Company’s affiliates.

Effective October 1, 2012 the Company entered into a reinsurance agreement with its

affiliate Globe. Starting in the fourth quarter of 2012, a 90% quota share of Globe’s direct

response business was ceded to the Company. Beginning in 2013, the agreement was amended,

and the quota share was reduced to 30% going forward.

Effective October 1, 2015 the Company entered into a modified coinsurance reinsurance

agreement with affiliate Family Heritage. Under a separate agreement Family Heritage is

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assuming all U.S. life business written by affiliate American Income, and was retroceding to

affiliate United American. Through a novation agreement, the Company has replaced United

American, and now assumes 100% of the liability originally assumed by Family Heritage from

American Income.

Ceded-Affiliates

The Company entered into an agreement with Globe on July 1, 1981, whereby the

Company cedes100% of the gross premiums on all direct mail non-participation modified whole

life insurance to Globe. Globe has full authority to administer and settle all claims and is

responsible for holding and maintaining the required reserves. The contract was amended

January 1, 2003 to include 3.31% ceding commission on all premiums collected.

The Company entered into a modified coinsurance agreement with TMK, Re, Ltd. (TMK

Re) effective January 1, 2000. This agreement provides 100% coverage on both individual and

group life insurance benefits on a block of whole life policies. TMK Re does not participate in

policy loans on the policies. The Company is responsible for claim settlements and maintains

records to support its claim payments. The Company administers the policies reinsured and

performs all accounting for the policies. TMK Re pays an experience refund when the formula

described in the agreement produces a positive amount. When the formula produces a negative

amount, the experience refund is zero and the remaining amount is carried forward and is offset

against any future positive experience refund.

Ceded-Non-Affiliates

Effective September 1, 1989, the Company entered into a coinsurance agreement with

The Lincoln National Life Insurance Company (Lincoln National). Under the terms of this

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agreement the Company cedes and Lincoln National assumes individual ordinary life insurance

with face amounts less than $500,000, submitted on a facultative basis.

The Company entered into an agreement with First Command Life Insurance Company

(First Command) effective July 1, 2001 whereby First Command assumes a 3% quota share of

preliminary term insurance, including riders and supplemental benefits. First Command

participates in policy loans made but does not participate in any other reinsurance that the

Company may have on the policies. The Company is responsible for benefit payments to

policyholders and claimants and the Company maintains records to support these payments.

The Company is a party to other reinsurance agreements which are not noted here due to

the fact they are in various stages of runoff, and for which limited reserve credit is taken.

General

All contracts reviewed contained standard insolvency, arbitration, errors and omissions, and

termination clauses where applicable. All contracts contained the clauses necessary to assure

reinsurance credits could be taken.

BODY OF REPORT

GROWTH

The following comparative data reflects the growth of the Company during the period

covered by this examination:

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2012 2013 2014 2015 Bonds $4,987,430,021 $5,095,338,973 $5,146,941,882 $5,275,111,078 Admitted assets 7,102,577,759 7,257,941,188 7,419,550,203 7,559,635,134 Aggregate reserves for life 5,970,189,072 6,172,013,314 6,331,137,763 6,481,149,545 contracts Total liabilities 6,510,405,796 6,668,213,722 6,841,015,742 7,033,852,586 Capital and surplus 592,171,963 589,727,466 578,534,461 525,782,548 Premium Income 584,199,927 565,935,398 575,267,505 626,512,830 Net investment income 344,809,053 340,064,316 341,193,225 343,436,232 Death benefits 168,712,929 172,715,722 188,271,420 193,812,529 Net income 174,328,656 151,087,686 164,681,100 73,866,299 Life insurance in force (000s) 47,317,058 47,287,936 48,416,777 56,832,892

FINANCIAL STATEMENTS

The following financial statements are based on the statutory financial statements filed by

the Company with the State of Nebraska Department of Insurance and present the financial

condition of the Company for the period ending December 31, 2015. The accompanying

comments on financial statements reflect any examination adjustments to the amounts reported

in the annual statements and should be considered an integral part of the financial statements. A

reconciliation of the capital and surplus account for the period under review is also included.

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FINANCIAL STATEMENT December 31, 2015 Assets Net Assets Not Admitted Assets Admitted Assets Bonds $5,275,111,078 $5,275,111,078 Preferred stocks 313,330,956 313,330,956 Common stocks 1,105,436 $ 340,800 764,636 Real estate held for production of income 203,337 203,337 Cash, cash equivalents, and short-term investments 167,130,534 167,130,534 Contract loans 254,683,796 890,644 253,793,152 Other invested assets 365,344,778 35,508,005 329,836,773 Subtotal, cash and invested assets $6,376,909,915 $ 36,739,449 $6,340,170,466 Investment income due and accrued 110,428,040 110,428,040 Uncollected premiums and agents’ balances 58,017,266 58,017,266 Deferred premiums and agents’ balances 33,348,601 33,348,601 Amounts recoverable from reinsurers 14,996,891 14,996,891 Funds held by or deposited with reinsured companies 833,690,283 833,690,283 Other amounts receivable under reinsurance contracts 18,725,059 18,725,059 Current federal income tax recoverable 4,738,426 4,738,426 Net deferred tax asset 140,589,000 21,763,000 118,826,000 Guaranty funds receivable 344,030 344,030 Electronic data processing equipment 8,543,636 8,394,278 149,358 Furniture and equipment 76,423 76,423 Receivables from parent, subsidiaries, and affiliates 17,798,278 17,798,278 Health care and other amounts receivable 3,965,270 3,965,270 Prepaid pension contribution 40,612,277 40,612,277 SERP rabbi trust-COLI cash value 8,402,436 8,402,436 Prepaid expense 1,741,260 1,741,260 Remittances and items not allocated 881,886 881,886 Totals $7,673,808,797 $114,173,663 $7,559,635,134

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Liabilities, Surplus, and Other Funds Aggregate reserve for life contracts $6,481,149,545 Aggregate reserves for accident and health contracts 218,547,422 Liability for deposit-type contracts 4,838,459 Life contract claims 66,461,070 Accident and health contract claims 23,627,000 Policyholders’ dividends 62 Policyholders’ dividends apportioned for payment 10,000 Premiums and annuity considerations received in advance 9,269,572 Other amounts payable on reinsurance 38,653,340 Interest maintenance reserve 35,890,311 General expenses due or accrued 12,985,040 Unearned investment income 968,364 Amounts withheld or retained by company as agent or trustee 6,258,874 Remittances and items not allocated 941,189 Asset valuation reserve 86,400,422 Payable to parent, subsidiaries, and affiliates 2,396,394 Total liabilities $7,033,852,586 Common capital stock $ 41,060,708 Preferred capital stock 1,330,000 Surplus notes 25,000,000 Gross paid in and contributed surplus 114,629,174 Unassigned funds (surplus) 343,759,666 Total capital and surplus $ 525,782,548 Totals liabilities, capital, and surplus $7,559,635,134

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SUMMARY OF OPERATIONS – 2015

Premium and annuity considerations $ 626,512,830 Net investment income 343,436,232 Amortization of interest maintenance reserve 3,881,305 Commissions and expense allowances on reinsurance ceded 22,455,252 Reserve adjustments on reinsurance ceded (36,951,449) Miscellaneous income 707,045 Amortization gain on in force business ceded 3,412,007 Investment income on funds withheld 56,488,708 Totals $1,019,941,930 Death benefits $ 193,812,529 Matured endowments 1,190,529 Annuity benefits 129,253,428 Disability benefits and benefits under accident and health contracts 66,370,956 Surrender benefits and withdraws for life contracts 49,085,191 Interest and adjustments on contract or deposit-type contract funds 1,180,259 Payments on supplementary contracts with life contingencies 75,553 Increase in aggregate reserves 149,513,644 Totals $ 590,481,625 Commissions on premiums, annuity considerations, and deposit-type contract funds $ 80,774,766 Commissions and expense allowances on reinsurance assumed 166,506,908 General insurance expenses 63,895,744 Insurance taxes, licenses, and fees 14,099,140 Increase in loading on deferred and uncollected premiums 1,285,259 MODCO reserve adjustment 4,810,248 Totals $ 921,853,690 Net gain from operations before dividends, federal income taxes and net realized capital gains $ 98,088,240 Dividends to policyholders 4,322 Federal income taxes incurred 24,199,500 Net realized capital losses (18,119) Net income $ 73,866,299

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CAPITAL AND SURPLUS ACCOUNT 2012 2013 2014 2015

Capital and surplus, beginning $622,369,825 $592,171,963 $589,727,466 $578,534,461 Net income $174,328,656 $151,087,686 $164,681,100 $ 73,866,299 Change in net unrealized capital gains 5,810,596 2,857,791 163,825 94,634 Change in net deferred income tax (16,535,000) (2,204,000) 11,468,000 20,554,000 Change in non-admitted assets 24,323,932 26,021,605 (29,348,004) (5,810,091) Change in asset value reserve (20,202,606) (10,675,122) (3,287,041) (6,526,518) Change in surplus notes (25,000,000) Change in surplus as a result of reinsurance (5,736,663) (4,781,585) (3,350,056) (3,412,007) Dividends to stockholders (170,844,000) (166,642,000) (151,087,000) (132,554,000) Change in executive benefit plan 3,657,223 1,891,127 (433,830) 1,025,771 Net change for the year $ (30,197,862) $ (2,444,497) $ (11,193,005) $ (52,751,913) Capital and surplus, ending $592,171,963 $589,727,466 $578,534,461 $525,782,548

EXAMINATION CHANGES IN FINANCIAL STATEMENTS Unassigned funds (surplus) in the amount of $343,759,666, as reported in the Company's

2015 Annual Statement, has been accepted for examination purposes. Examination findings, in

the aggregate, were considered to have no material effect on the Company’s financial condition.

COMPLIANCE WITH PREVIOUS RECOMMENDATIONS

The recommendations appearing in the previous report of examination are reflected

below together with the remedial actions taken by the Company to comply therewith:

Investment Review – The Company’s Board of Directors minutes from 2008 to 2011 did not include evidence showing that the investment transactions had been approved on a quarterly basis in compliance with Nebraska Insurance Statute 44-5105(3)(a). Action: The Company has complied Custodial Agreements – It was noted in review of the Company’s custodial agreement with the Bank of New York, that the agreement is not in compliance with Nebraska Rules and Regulations, Title 210 Chapter 81. In addition, the agreement with the Bank of New

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York states that the, “agreement shall be subject to certain custodial requirements imposed by the Delaware Department of Insurance. Action: The Company has complied. Affiliate Agreements - Review of intercompany service contracts revealed an instance in which contract verbiage required by SSAP 25, Paragraph 6, requiring provision for timely settlement of amounts owed, with a specified due date, was not included. Action: The Company has complied

COMMENTARY ON CURRENT EXAMINATION FINDINGS

There are no comments or recommendations that have been made as a result of this

examination.

SUMMARY OF COMMENTS AND RECOMMENDATIONS

There were no findings warranting comment as a result of this examination.

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ACKNOWLEDGEMENT

The courteous cooperation extended by the Officers and employees of the Company

during this examination is hereby acknowledged.

In addition to the undersigned, Kim Hurst, CFE, Natasha Bowland, Santosh Ghimire,

Kim Stevenson, Financial Examiners; Gary Evans, CFE, CISA, AES, Information Systems

Specialist; and Rhonda Ahrens, FSA, and Derek Wallman, Actuarial Examiners; all with the

Nebraska Department of Insurance and the Financial Examiners contracted by the Indiana

Department of Insurance; participated in this examination and assisted in the preparation of this

report.

Respectfully submitted, _____________________________ Tadd K. Wegner, CFE

Supervisory Examiner Department of Insurance State of Nebraska